The necessity of corporate failure (why government intervention leads to larger disasters)

Washington Times ^ | 03/24/2010 | Richard Rahn

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The expression "Failure is not an option" may be a motivator for very high-risk situations, but failure must always be an option for players in a properly functioning market economy. If you had a choice between buying a bond issued by a company considered "too big to fail" - which is an implicit government guarantee of its debt - would you buy that bond or one issued by a company without a government guarantee? Companies with government guarantees will be able to borrow at less cost, and, ultimately, their unfair competitive advantage will drive the companies without guarantees out of business.

You may believe that the housing bubble and the subsequent financial meltdown were caused primarily by the Fed or Fannie Mae and Freddie Mac (the two multitrillion-dollar government-sponsored secondary mortgage buyers) or by the very largest commercial and investment banks. But whichever theory you choose, note that it was either the government or those heavily regulated by the government that were the source of the problem - and all were considered "too big to fail." Fannie and Freddie, as everyone knew, had an implicit government guarantee. And the very largest banks grew into the financial behemoths they became largely through mergers rather than internal growth. Former Federal Reserve Gov. Martha R. Seger recently reminded me that every one of those bank mergers was approved by the Fed and, in some cases, encouraged by the Fed.

The cry from the political class is, as always, "We need more government regulation" - and the establishment media, as always, are cheering. Do we really need more government regulation?